the right way to invest blog

Stock markets are comprised of a collection of stocks. Good stocks, bad stocks, and all stocks in between can be found in a particular stock market. There are multiple stock markets across the world, and while we can’t directly invest in those markets, we can invest in products that closely track those markets. As I wrote above, all types of stocks are found in a stock market, so what happens to returns when we pull out a specific group of stocks?

It is common for a subset of stocks to drive a sizeable portion of an overall market’s return. Here you will find a DFA study that shows removing the top 10% of performers each year from 1994 to 2018 reduced global market performance from 7.2% to 2.9%! And further excluding the best 25% turns a positive return into a relatively large negative return!

If only we could predict which performers would be the best – and the worst – we could ramp up our returns…but we can’t. And oftentimes past best performers don’t continue their strong performance into future years. Therefore, we must own a diversified portfolio. We don’t know which stocks will be the best, or the worst, or somewhere in between, but if we hold all of them, we’ll get the best, the worst, and the middle, and be left with a pretty decent return on our investment. If we pick and choose, and get it wrong, we’ll be left with paltry returns, or even no returns and actually a loss of our money…something we can’t have happen when we look to build our nest egg for retirement.

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Michael Pensinger, CFP® is Owner and President of Pensinger Financial, Inc.

He grew up in Park Forest, Illinois and now resides in Lemont, Illinois with his wife, two children, and two dogs. Michael serves as Treasurer on the Lemont Area Chamber of Commerce Board of Directors and he volunteers for the Lemont Open Space Committee. Read More